He wrote in a note, "Apple’s strength in iPhone and iPad sales are negatively affecting Amazon.com by accelerating the company’s transition from physical to digital media sales (which has effects on sales, margins and ROIC) as well as impacting Electronics & General Merchandise (“EGM”) growth."

Devitt downgraded the stock from "overweight" to "equal-weight". (Seems to like downgrading from a buy to a hold.)

In the long term, Devitt believes Amazon comes out stronger. In the short term, he's expecting pain.

Here are two big reasons according to Devitt, our emphasis added:

"In CQ4:11, Apple reported $33.6B of sales from two products – iPhone and iPad, which was more than 3x the size of Amazon.com’s entire EGM category. Importantly, Amazon.com is not a licensed retailer of iPhone and iPad, which has left a noticeable gap in Amazon.com’s consumer electronics portfolio. The true impact manifests itself in the sales growth deceleration of Amazon.com’s North America (“NA”) EGM sales line, which decelerated in CQ4:11 to +27% y/y growth (excluding Kindle Fire) from +44% y/y in CQ3:11. While most investors focused on Amazon.com’s Media sales deceleration, the EGM deceleration is more significant since it is the segment that investors expect the most share gains from over time."

In a less direct way, Apple and other digital media startups are causing problems for Amazon:

"The second derivative impact of Amazon.com’s Apple issue is that mobile device proliferation is accelerating the shift of books, music, video and video games to digital distribution. Amazon.com is currently the market share leader in books but otherwise faces an uphill battle.

We estimate that ~40% of Amazon’s media sales or ~16% of total sales comes from non-book media sales, and we believe this revenue stream is increasingly at risk to companies such as Apple, Netflix, Pandora, Spotify, etc.

We believe Amazon.com is particularly focused on two of the four media categories – books and video. The books category has already been a huge success and given the media war that Amazon.com is now fighting to sustain its media business through the digital transition, we think Amazon.com will spend as much as it needs to in video to win top-spot within the second media category. With that said, we are incrementally negative on Netflix as we believe Amazon.com has competitive strengths that could aid in its war for video market share, namely its video streaming delivery infrastructure and its large, engaged customer base.

Furthermore, Amazon.com has the necessary capital to ‘pay to play’ in this area (Netflix spends $1.5B-$2B per year on content). As it relates to music and video games, we believe Amazon.com is currently in a more difficult position and may choose to buy vs. build in these areas over time.

Net / net, Apple is a problem for Amazon.com and the first / second derivative impacts will drive Amazon.com to continue spending aggressively for an extended period in the areas of discounted hardware devices, acquiring content, etc to sustain its competitive position within the media category."

So, why is he positive on Amazon?

We expect that Amazon.com will make it through this transitional period a stronger company, and we believe more than ever in its long-term prospects. Amazon.com remains our highest conviction, favorite long-duration business model. The potential to be an increasingly destructive force in the retail industry for physical goods has never been higher. We also expect Amazon.com to come out on the other side of the digitization cycle with a leadership position but expect it to be an expensive battle along the way, particularly in the areas of hardware and the transitions of the music, video and video game segments.